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Vonage Files to Go Public, Names New CEO
[February 08, 2006]

Vonage Files to Go Public, Names New CEO

TMCnet Wireless and Technology Columnist
Vonage Holdings, the leading nation’s leading provider of voice-over-IP telephone service with over 1.4 million subscribers, has filed to go public through a $250 million initial public offering and has appointed Michael Snyder, formerly with Tyco International’s ADT Security Services, to take over as chief executive officer, the company disclosed in a regulatory filing on Wednesday.

The much-anticipated S-1 filing comes on the heels of a $250 million of private placement of senior unsecured convertible notes that the company used as interim financing for marketing and operating expenses. At the time, there had been speculation that weak market conditions for related telecom stock offerings had saddled Vonage indefinitely.

But Wednesday’s filing puts an end to all the rhetoric, which have circulated since last summer when press reports put the size of the IPO as large as $600 million. And at least one analyst believes a couple things can be inferred by the smaller size of the actual offering and the need for the interim private placement.
One indication could be that Vonage might not have received the asking price they wanted in a privately negotiated transaction, according to Will Stofega, VoIP analyst at IDC. More importantly, though, Vonage clearly needs the financing to maintain its standing in the broadband market.
The IPO filing offers key metrics of the Vonage’s business for the first time, which competitors, analysts and market participants in general have been anxiously awaiting. Of its 1.4 million subscribers, Vonage said that more than 95 percent of its subscriber lines are U.S. customers. The company has grown dramatically from just $18.7 million in revenue in 2003 to $79.7 million in 2004 and $174 million in just the first three months of 2005. Fourth quarter results weren’t available at the time of the filing.
Despite that growth, the company’s expenses (specifically marketing costs) have skyrocketed resulting in more than $300 million in losses since its inception. And given the competitive landscape, Vonage is expecting to stay in the red for some time. Without going into specifics, the company warned “we are pursuing growth, rather than profitability, in the near term.”
Marketing costs alone represent 101 percent of total revenue in the first nine months of 2005. And if the company needed to maintain that run rate, Vonage will be hard-pressed to find additional financing sources, Stofega said.
“They are going to need more money. They've already been to every VC in town,” he said. “I don't know where they're going to get it but they're going to need more.”
But Stofega also faults Vonage for not taking steps to diversify its strategy away from the highly competitive game of capturing a critical mass of subscribers. By offering value-added services or expanding vertically into video or Triple Play services, the IDC analyst believes Vonage could reduce its risk factors longer term.
“What we've heard and what we've seen is maybe you don't need to be that huge company. Trying to replicate the PSTN in IP network, I don't think anyone can do it,” Stofega said.
As part of the executive changes, Vonage Chairman Jeffrey Citron has resigned the role of CEO and will assume the new role of Chief Strategist. He had been CEO since January 2001. Citron will, however, retain the title of chairman and will be responsible for overall strategy, employee culture and public relations. Snyder, who was president at Tyco’s ADT Security Services, is expected to join Vonage by the end of the month.
Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.

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